U.S. Dollar to Regain Strength as Markets Overprice Fed Rate Cuts
By Sarupya Ganguly
According to a recent Reuters poll, the U.S. dollar is expected to bounce back in the next three months as financial markets have possibly overestimated the number of Federal Reserve interest rate cuts for the year. Despite a 5% increase earlier this year, the greenback has lost a significant portion of its gains against major currencies due to concerns over weak U.S. economic data prompting expectations of multiple rate cuts starting in September.
Following disappointing jobs data, markets now anticipate around 120 basis points worth of rate cuts from the remaining Fed meetings this year, compared to just 50 basis points a few weeks ago. However, policymakers are pushing back against recession fears, which may lead to a reevaluation of these expectations.
FX strategists in the poll predict a decline in the euro from $1.10 to $1.08 by end-October, before rebounding to $1.11 in a year. The Japanese yen, on the other hand, is expected to maintain its recent gains against the dollar, reaching 144/$ in a year.
Despite recent market volatility, some analysts believe the dollar’s strength may not be over yet, emphasizing the importance of careful consideration in high volatility environments. Speculators have slightly increased their net long bets on the dollar, indicating mixed sentiments among forecasters regarding the currency’s future performance.
Overall, the outlook suggests that once the U.S. economy realigns with global economic trends, the dollar’s overvaluation may start to normalize, potentially impacting its performance going forward.